GST on non-monetary rewards for sales targets held taxable supply; value based on section 194R, rule 35

The AAR held that non-monetary benefits/perquisites (such as gifts and tour packages) received by the applicant from the manufacturer for achieving sales targets constitute "supply" of services in the course or furtherance of business under GST. The applicant is supplying sales promotion/business support services to the manufacturer, who is the recipient, and must therefore raise a tax invoice and discharge GST on such consideration. For valuation, the value of the supply is to be taken as the value of the benefits as determined by the manufacturer and reflected in the TDS certificate issued under section 194R of the Income-tax Act. The applicant may issue tax-inclusive invoices in terms of rule 35.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether non-monetary benefits/perquisites (free gifts, complements, tour packages, etc.) received from manufacturers by a dealer/distributor, on which tax is deducted at source under section 194R of the Income Tax Act, constitute a "supply" under section 7 of the GST Act.

1.2 Whether such non-monetary benefits/perquisites amount to "consideration" for services supplied by the dealer/distributor to the manufacturer in the course or furtherance of business.

1.3 Whether the tax invoice raised by the dealer/distributor on the manufacturer in respect of such non-monetary benefits/perquisites is valid under the GST Act, and who is the supplier/recipient for GST purposes.

1.4 How the value of such supply is to be determined under GST when consideration is not wholly in money, including whether the value on which TDS is deducted under section 194R of the Income Tax Act should be adopted and whether the value may be treated as tax-inclusive.

1.5 What is the nature and rate of tax applicable to the said supply under the GST law, and whether any exemption applies.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Characterisation as "supply" and existence of "consideration"

Legal framework discussed

2.1 The Court examined section 7 of the GST Act defining "supply", emphasising that all forms of supply of goods or services or both for a consideration by a person in the course or furtherance of business are covered. The elements identified were: (i) for a consideration; (ii) by a person; and (iii) in the course or furtherance of business.

2.2 The definition of "consideration" in section 2(31) was analysed, noting that it includes payment made or to be made "in money or otherwise" and the "monetary value of any act or forbearance", in respect of or in response to, or for the inducement of, a supply.

2.3 The definition of "person" in section 2(84) was referred to, to show that entities such as manufacturers and dealers/distributors are covered.

Interpretation and reasoning

2.4 The Court noted that the manufacturer provides non-monetary benefits/perquisites (free gifts, tour packages, etc.) to the dealer/distributor based on performance and sales, and deducts TDS under section 194R of the Income Tax Act on the value of such benefits. These benefits are reflected in the dealer's Form 26AS.

2.5 It was held that, though the benefits are not in money, they constitute consideration "in kind" flowing from the manufacturer to the dealer/distributor. Correspondingly, the dealer/distributor provides an identifiable benefit to the manufacturer in the form of "augmentation of sales" or "promotion/business support of sales". There is a quid pro quo.

2.6 The Court held that the activity of augmenting or promoting the manufacturer's sales is carried out in the course or furtherance of the dealer's business and thus satisfies the business nexus requirement under section 7.

2.7 It was observed that the concept of TDS under section 194R is premised on the benefit/perquisite being income in the hands of the recipient, which in this context reinforces that there is a commercial benefit forming consideration for business-related services.

Conclusions

2.8 The non-monetary benefits/perquisites received by the dealer/distributor from the manufacturer, in the circumstances described, constitute consideration in kind for services of sales promotion/augmentation or business support rendered by the dealer/distributor to the manufacturer.

2.9 The transaction satisfies all elements of "supply" under section 7 of the GST Act and is unequivocally a "supply of services".

Issue 3: Validity of tax invoice and identification of supplier/recipient

Interpretation and reasoning

3.1 The Court considered that the dealer/distributor is the party performing the service of augmentation/promotion/business support of sales, and the manufacturer is the beneficiary of such service.

3.2 Given that the non-monetary benefits/perquisites constitute consideration for this service, the dealer/distributor is the "supplier" and the manufacturer is the "recipient" for GST purposes.

3.3 Accordingly, the dealer/distributor, being the supplier of taxable services, is obliged to issue a tax invoice to the manufacturer and charge GST on the value of such services.

Conclusions

3.4 The tax invoices raised by the dealer/distributor on the manufacturer in respect of the non-monetary benefits/perquisites received are valid under the GST Act.

3.5 The dealer/distributor is the taxable person supplying support/promotion services to the manufacturer, who is the recipient of such services.

Issue 4: Valuation of supply and relevance of TDS under section 194R

Legal framework discussed

4.1 The Court noted that as the consideration is not wholly in money, the value cannot be determined solely under section 15 of the GST Act. Rule 27 of the valuation rules was applied for "value of supply where the consideration is not wholly in money".

4.2 Rule 27 provides for valuation based on (a) open market value; or (b) sum total of consideration in money plus the monetary equivalent of non-monetary consideration; or, failing these, other prescribed methods.

4.3 Rule 35 was examined in relation to value of supply being inclusive of tax, prescribing a formula for deriving the tax amount where the consideration is treated as tax-inclusive.

Interpretation and reasoning

4.4 The Court treated the value of the benefits/perquisites determined by the manufacturer for purposes of deducting TDS under section 194R (and reflected in the TDS certificate/Form 26AS) as representing the value of the benefit received by the dealer/distributor.

4.5 It was reasoned that this value, being the monetary valuation of the non-monetary consideration, can be adopted as the value of the taxable supply under Rule 27, in the absence of any other open market value placed on record.

4.6 Since the dealer/distributor is not receiving any amount over and above the value reflected in the TDS certificate, and only the non-monetary benefit is received, the Court held that the invoice can be issued treating that value as inclusive of GST in terms of Rule 35.

Conclusions

4.7 The value on which TDS is deducted under section 194R of the Income Tax Act, as reflected in the TDS certificate/Form 26AS, is to be treated as the value of the supply of services by the dealer/distributor to the manufacturer for GST valuation purposes.

4.8 The dealer/distributor may raise the tax invoice on the manufacturer for the said value treating it as tax-inclusive, and compute the GST component in accordance with Rule 35.

Issue 5: Nature, taxability and rate of tax; applicability of exemption

Legal framework discussed

5.1 The Court examined whether any exemption under Notification No. 12/2017 - Central Tax (Rate) applied to the transaction and found no entry granting exemption to such sales promotion/support services.

Interpretation and reasoning

5.2 Given that the transaction is a "supply of services" (support, promotion or business support services) for consideration in the course or furtherance of business and not covered by any exemption, the supply is taxable.

5.3 The Court categorised the services as "support services" generally taxable at the standard rate under the GST law.

Conclusions

5.4 The transaction is a taxable supply of support/promotion/business support services by the dealer/distributor to the manufacturer under section 7 of the GST Act.

5.5 No exemption under Notification No. 12/2017 - Central Tax (Rate) is available for such services.

5.6 The benefits/perquisites constitute taxable income in the hands of the dealer/distributor and are liable to GST at the rate of 18% applicable to such support services.

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